Personal Income tax exemption to income earned on worked performed abroad – recent rulings

The Spanish Supreme Court, in its ruling dated 25 February 2021, establishes that the exemption provided for under article 7.p) of the Personal Income Tax Act, for income derived from work performed abroad, should also apply during the days in which the worker was traveling.

The Spanish Personal Income Tax Act in article 7.p) provides for an exemption applicable to income earned as a result of work performed abroad.
This exemption applies to income earned during the days where the worker was effectively abroad. With a limit of 60.000 Eur. per year, provided the following requirements have been fulfilled:

• The work must be performed for a business or an entity not resident in Spain or for a permanent establishment outside Spain; and
• The country where such work is performed must apply a tax identical or analogous to Spanish Personal Income Tax and must not be considered a tax haven.

The terms "income for work effectively performed abroad" within the meaning of article 7.p) have been controversial and subject to dispute between the tax authorities and the taxpayer. Spanish tax Authorities have considered that those days where the worker is traveling should not be taken into account in the calculation of the number of days abroad. The reasoning was that the worker was not able to dedicate a full day's work abroad while traveling.

The Spanish Supreme Court, however, has recently ruled (ruling 274/2021, dated 25 February 2021) that "income for work effectively performed abroad" should include the income derived during all the days during which the worker is travelling to the country of destination or back to Spain, not only such days where the worker is effectively abroad.

More specifically, this ruling resolves the case of a worker who, in 2013, spent several days working abroad. In his income tax return, the worker applied the exemption provided for under article 7.p) and included in the calculation the days of travel. The Madrid tax office, however, issued a tax assessment in relation to the personal income tax of such worker on the basis that the exemption would not apply to the days of travel. The assessment was upheld on appeal by the Madrid Court.

The Spanish Supreme Court, however, took the contrary view and held that "income for work effectively performed abroad" should include the income derived during all the days during which the worker is travelling to the country of destination or back to Spain, not only such days where the worker is effectively abroad.

The Spanish Supreme Court considers that the position taken by the tax authorities and upheld by the Madrid Court is illogical and contrary to the objectives of the law. The Supreme Court holds that a consistent and reasonable interpretation of the terms "income for work effectively performed abroad" should include the income derived during the days of travel and that failing to take such days into account would contradict the principles of this exemption. Moreover, the Supreme Court adds that article 7.p) does not establish a minimum number of days in order for the exemption to apply and, therefore, a restrictive interpretation of the article would be contrary to logic and to the objective of the law.

This ruling is significant since it will allow taxpayers to apply the exemption to income earned on all days spent abroad performing his work duties, including the days of travel. In this regard, the position followed by the Supreme Court is consistent with the objective of the exemption, which is to favour the internationalisation of human resources.